kenny1703 (< 20)

July 2012

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Last week’s market tug of war seemed to be better than expected U.S. earning versus European woes. Europe clearly won Friday as the markets spent the good part of the trading session face down in the mud, refusing to move after their loss.

While a number of big names including General Electric beat earning estimates, only 45% of companies that have reported topped the revenue expectations. That's the lowest percentage since the first quarter of 2009, according to FactSet. Over the past four years on average, 56% of companies reported actual sales above the mean sales estimate at this same point in earnings season.

So Europe was easily able to yank the proverbial rope across the center line as things from Spain have gotten particularly dicey. Home prices are absolutely imploding, bad loans are mushrooming, and bank deposits are dwindling. According to reports out of Europe, 100 billion euros will not be enough to shore up Spain’s banking system.

And speaking of banks, Moody’s downgraded the credit rating of 13 Italian banks. According to Moody’s the two main factors for the downgrade were:

“1. Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base.

2. Italy's near-term economic outlook has deteriorated, as manifest in both weaker growth and higher unemployment, which creates risk of failure to meet fiscal consolidation targets which could weaken market confidence further, raising the risk of a sudden stop in market funding. “

Of course this tug of war isn’t over because we all know that the United States has the secret rope pulling weapon. When you have Ben Bernanke and his printing presses as an on-demand anchor, the markets won’t remain down for long.

From the tug of war, to the tug of weird, Silver Sponge Bob Square Pants coins minted in New Zeland were among assets seized by FBI agents from the vault at Peregrine Financial Groups headquarters last week. So while there may be a lack of confidence in the broader financial markets, remember “IN SPONGEBOB WE TRUST!”

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Since day one of Ben Bernanke’s testimony did not provide any clear signs of when we could see another round of quantitative easing, Big Ben has gone into obfuscation mode and he’s playing it close to the vest.

Perhaps, we might need to look at the moon for a market tip.

On Tuesday Mr. Bernanke will have the second day of his testimony and the moon, yes the moon, will have a new phase. Since Ben will remain tight lipped, we might need to review previous studies on how the major indexes have performed during the changing of the moon’s phases. The market psychics aren't answering their phone

Actually, the Buy the new moon and Sell the full moon strategy in past years has had some success, but so far this year the S&P futures contract is not highly correlated. Surprisingly, the inverse of this strategy has worked - buy the full moon sell the new moon has been profitable four months out of seven this year.

Maybe Ben will take some cues from his lunar guides and invert his monetary strategy. Since QE’s past haven’t worked and QE’s future have already been priced into the market, maybe he should tell Congress that he is turning off the printing presses and that his policy of forced liquidity has failed miserably

But expecting that type of prudent talk from "Helicopter-Ben" is as likely as a square moon.

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The Dodd-Frank Act, the financial reform measures that Congress passed in the summer of 2010, (or more aptly name The Frankly-Do-nothing Act) called for the majority of the $600 trillion derivative market, including credit default swaps, to be traded on exchanges and for transactions to go through clearing houses.

None of this has happened. That’s right, zip, zero, nada. Prices of credit default swaps can still be based solely on a dealer’s say-so. And yes, these credit default swaps were a main trading instrument that led to JP Morgan's recent $2 billion trading loss. The folks on Fraud Street have no interest in changing the way things are done. Why would they want to put an end to their private profit party?

Now, they are lobbying vigorously against the Commodity Futures Trading Comission's proposal that swap execution facilities provide market participants with easily accessible prices on “a centralized electronic screen.” But of course the commission’s rule would eliminate the one-to-one dealings by telephone that are so lucrative to the fraud street banksters.

Gretchen Morgenson writing in the New York Times, hits the nail on the head writing about regulations in the United States “The British, at Least, Are Getting Tough

“It’s hard to believe, in the wake of the Libor mess, that Wall Street and its supporters in Congress would continue to battle against price transparency in any market. Then again, that’s precisely what they did after the credit crisis.....With each new financial imbroglio, the gulf widens between Main Street’s opinion of Wall Street and the industry’s view of itself. “ When it comes to the real players in the US financial markets, there is about as much regulation as at a swap meet. Trade well and follow the trend, not the so-called “experts.”

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Friday’s stock indices all closed markedly higher, which came after huge higher gap opens. What happened in between the higher gap opens and the close was nothing. The markets were dead…until the closing bell. Only then was there life when the markets went even higher on a short covering explosion.

Stocks opened around 2% gap higher this morning after the late-night headlines from Europe made many think that the tooth-fairy and Santa are real once again. S&P 500 e-mini futures saw some selling into the open but then stabilized amid a very narrow range for much of the rest of the day - leaking higher on low volume-driven short-covering. The news from Germany of ESM ratification was greeted with absolutely no price movement as an indication of just how insane things are but the need to drive stocks up in the last few minutes was crazy. Into the close, volume exploded as ES rose 10pts in minutes from absolutely nowhere. Average trade size was very heavy during this period and delta skewed notably to block selling into the ramp though it is never that obvious. ES closed above its 50DMA back to its highest since 5/8.

The Window-Dressing Roadmap

It would appear that the No 'New' QE from the FOMC on 6/20 left a lot of all-important funds long-and-very-wrong. Today's rampfest miraculously lifted (window-dressing) Energy and Financials (two of the MOST sensitive sectors to QE) back to perfectly unchanged from the exact time of the FOMC announcement. Notably, since that exact time 'safe' sectors of Staples, Healthcare, and Utilities have outperformed as Tech, Materials, and Discretionary are underperforming (though all did their very best to end the month up (especially relative to the FOMC news moment)... fascinating eh?

While stocks exuded every bit of total insanity, Treasuries ended the week lower in yield across the whole complex (leaving Gold, the Long Bond, and the USD all almost perfectly +2.8% YTD). WTI is down 14.5% YTD to close Q2 thanks to a huge VW-like 9% squeeze higher today (that acounted in correlated risk terms for around half of equity's performance) up to around $85. Equity and HY credit have recoupled but HYG is the most expensive relative to its fair-value in over a month. The USD plunged on EUR strength (and AUD carry trades) to end the week -0.66% but Gold and Silver more than doubled those implied gains ending the week +1.8%. VIX tested below 17% late on but ended above it (down 2.6 vols) closing at 6/20 closing levels. The main takeaway is that most risk assets recovered to last week's highs but stocks turned the amplifier of insanity to 11 and pushed back to near two-month highs not to be outdone into quarter-end (wink wink). Trade well and follow the trend, not the so-called “experts.” _________Larry Levin President & Founder - TradingAdvantage [more]

Recs

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In the fallout from the 2008 global financial crisis, there have been moments that have been driven by pure fear. These are the moments when it can be hard to maintain your composure and trade your plan. Unfortunately, these big days are the times when you need that composure the most. Here is a quick lesson in why it is important to keep focused in a scary market and how to achieve that focus. Market Basics

First let us understand some market basics. Markets exist to facilitate trade. From moment to moment the market offers traders the opportunity to profit from price movement. It's an environment where every trader has the freedom to create his own results, i.e. all the choices and the power to exercise those choices reside with the trader.

'Scary' implies fear, anxiety, or insecurity.

In his book, The Disciplined Trader, Mark Douglas addresses these issues in a no-nonsense, no holds barred way.

Let me give you an example of his views on this subject:

"It was only the lack of trust I had in myself to do what was needed to be done that I was really afraid of."

"The market is never wrong in what it does; it just is."

"The market cannot take anything away from you that you don't allow." "In the trading environment the outcome of your decisions is immediate, and you are powerless to change anything except your mind. You have to learn to flow with the markets; you are either in harmony with them or you are not." It becomes self evident that your trading success will be dependent on your ability to correctly perceive opportunity, to execute a trade arising from that perception and your ability to allow your profits to accumulate.

Are You Consumed by Fear?

Markets are inherently scary. If you are a trader consumed by fear, then the market will always be scary, and the only variable is how scary it is at any given time. When consumed by fear a trader is doomed to failure. Fear will twist your perceptions and blind you to the opportunities available. Fear will almost always drive us to make the wrong action, and it will without question make us totally incapable of accumulating profits that might be made. Even for disciplined and proven successful traders, the markets can be scary.

Objectively scary markets can be quantified by the Volatility index, the VIX - the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Levels below twenty are associated with market complacency and over thirty with increasing market anxiety. Extremes are often excellent contrarian indicators.

Trading should be considered a business, and your rules should reflect good business practices. These would include adequate capitalization. Conservation of capital is your primary job. If you are under-capitalized, you are half way to the losers stall before you even start.

Over-Trading & You

Do not over-trade. This too will drain your energy, your attention to detail, your perception of price changes and the efficiency of your trade execution. Over-trading will inevitably drain your capital from your account to the guy on the other side of your trades, who you can be sure does not have his/her perceptions blunted. If you have this as your guiding star, chances are you will eventually succeed in this business. Preserving capital is closely associated with risk management, and I will address this in the five things you can do when there is evidence of market anxiety.

5 Rules to Trade By

1) Stick to a Trading System that has proved itself over time to be profitable despite losing trades. No system is 100% correct. It only needs to be correct 50% of the time if profits are substantially greater than losses.

2) Never Anticipate Your System. Let your system fully play out so that its various criteria are fulfilled before entering your trade. When in doubt keep out or if already in a trade, get out!

3) Always Use Stops; NEVER trade without them. Make it your practice to enter your stop loss trade before you enter your trade.

4) Never Let a Winning Trade Become a Losing Trade; use a trailing stop once your trade is showing a profit. Once a trade is showing a two-point profit, consider bringing in your stop to the entry price. Should the market unexpectedly reverse, it would be a scratch trade. After that, trail your stop two points for every two points prices move in your favor.

5) Trade with the Trend. Do not attempt to pick tops and bottoms to trade against the trend. Following these principles and spending the time necessary to create the psychological stability necessary to succeed is the most difficult part of this profession. Your goal should be to have the self knowledge and confidence that you unquestionably believe in your trades. Identify with Mark Douglas' dictum, "markets can't do anything to any trader who completely trusts himself to act appropriately, in his best interests, under all market conditions."